Wisdom of the “Great One.”
I’m probably the only guy in hockey who can win a scoring title and everybody is saying I had a bad year. I don’t worry about it. ~ Wayne Gretzky
This Gretzky Quote can be applied to the U.S. economy. Granted, even I am not thrilled about 2.0% annual GDP growth. However, when I look around the World, it is clear that the U.S. economy is the scoring leader. Yes, the U.S. economy is winning the title by scoring 30 goals instead of 50 goals, but the game has changed. Even Wayne has acknowledged that hockey has changed since he was in his prime and that he could not score as many goals in a season as he did back then, if he played today (he scored 92 goals in 1981-82). Yes, China is growing at somewhere between 4.0% and 7.0%, but as China matures, it is akin to playing at a higher level. At some point, China will probably grow at a pace which is similar to other developed economies. I.E. Slower.
The construct of the U.S. and global economies have changed in recent decades. I believe these changes are manifesting in how equity markets are reacting to oil prices. In a consumer-driven economy, one might expect stocks and junk debt to rally when oil prices fall. However, major equity indices are mainly comprised of companies which do not directly benefit from retail spending. Also, it has become apparent that much of the post-recession expansion was due to the so-called commodities “Super-cycle.” The result could be that lower fuel prices are good for many low-income consumers, somewhat less beneficial for middle income and high income consumers and an overall negative for many businesses.
A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be. ~ Wayne Gretzky
In today’s Wall Street Journal, former Dallas Fed vice president, Gerald O’Driscoll Jr., has written an op/ed discussing the possibility of a global financial crisis. Like me, Mr. O’Driscoll does not see a global financial crisis on the horizon. Mr. O’Driscoll’s analysis of the oil industry and its effect on the economy is similar to mine. He writes:
“Pundits are focused on collapsing oil prices, which reflect the technological revolution in production among nimble private producers, combined with weakening global demand for their product. The result has been layoffs in the energy industry, and there will be more. Weak and highly leveraged energy firms have gone bankrupt and more will. But bankruptcy doesn’t necessarily mean that production will decline.”
This paragraph speaks volumes. Having some oil exploration and production companies file for bankruptcy does not mean that production will slow. Some companies which go completely out of business (Chapter VII bankruptcy) would have their assets, leases, etc. purchased by surviving companies. This would increase efficiencies in the oil patch, which could result in profitability at lower oil prices. In cases where companies file for Chapter XI protection, these companies would be able to shed debt which could make them profitable at lower oil prices. Thus, counting on bankruptcies to send oil prices higher could be a bad strategy.
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